NeoGenomics, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated financial statements; comparisons are with the corresponding 2016 periods unless noted. NeoGenomics operates cancer-focused clinical testing laboratories and provides pharmaceutical and clinical-trial services.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $63.1 million | $60.8 million | $190.8 million | $183.6 million |
| Gross profit / margin | $28.8 million / 45.7% | $27.3 million / 45.0% | $87.2 million / 45.7% | $83.1 million / 45.3% |
| Operating income (loss) | $(3.4) million | $1.4 million | $(2.2) million | $5.5 million |
| Net income (loss) | $(5.1) million | $(0.1) million | $(5.8) million | $0.5 million |
| Net loss attributable to common stockholders | $(7.8) million | $(5.6) million | $(13.7) million | $(16.2) million |
| Basic and diluted loss per share | $(0.10) | $(0.07) | $(0.17) | $(0.21) |
| Operating cash flow | — | $12.3 million | $21.7 million |
- Q3 clinical testing revenue rose 1% to $56.2 million; Pharma Services revenue rose 37% to $6.9 million. Nine-month revenue increased 4% in both businesses combined.
- Clinical genetic testing volume increased 16.6% in Q3 and 16.0% for the nine months, while average revenue per test declined 11.2% and 9.5%, respectively. Management cited test mix, including lower-priced PD-L1 tests, and a 19% Medicare reimbursement reduction for flow cytometry.
- General and administrative expense rose to $23.3 million in Q3 and $66.7 million for the nine months. Bad-debt expense, professional fees and personnel costs contributed; bad debt reflected payer authorization and denial issues and Clarient billing integration.
- Cash and equivalents were $12.2 million at September 30, 2017, versus $12.5 million at year-end 2016. Working capital was $45.6 million. Nine-month investing cash use was $10.2 million and financing cash use was $2.4 million.
- Total debt was $106.9 million, including $25.4 million drawn on the revolving facility; the balance sheet reported $96.6 million of long-term debt, net. The $75 million revolver had approximately $9.3 million available, subject to borrowing capacity. The company reported compliance with financial covenants.
- Accounts receivable, net, was $62.7 million; days sales outstanding increased to 91 from 84 at December 31, 2016. The allowance for doubtful accounts was $10.9 million.
Material changes and notable items
- Operating results weakened despite revenue and gross-margin growth: operating loss was $3.4 million in Q3 versus operating income of $1.4 million a year earlier. Higher G&A costs and a $1.1 million loss on the Path Logic sale were significant factors.
- Operating cash flow declined $9.4 million year over year for the first nine months, primarily due to increased receivables and higher DSO. Capital spending also increased to support laboratory, facility and technology investment.
- Management identified an error involving accruals for unbillable tests in periods from Q4 2016 through Q2 2017. It said prior-period impacts were not material and no restatement was required; Q1 and Q2 2017 revenue had been overstated by approximately $1.7 million and $0.2 million, respectively. The Q3 correction reduced reported revenue by $2.4 million; the nine-month correction was $0.6 million.
- The company acquired an Ascend Genomics customer list on August 31 for 450,000 restricted shares, recorded as an intangible asset. It also sold Path Logic on August 1.
- Series A preferred stock had a $30.1 million carrying value and a $49.5 million remaining face/liquidation value. Deemed dividends and beneficial-conversion-feature amortization reduced earnings attributable to common stockholders.
Outlook, risks and contingencies
- Management expected cash on hand, available borrowing capacity and operating cash flows to fund commitments and interest payments for at least the next 12 months. It forecast 2017 capital expenditures of $16.0 million to $18.5 million.
- Pharma Services signed-contract backlog increased to $58.0 million at September 30 from $46.5 million at June 30. Management expected backlog to support future-quarter revenue; the Geneva laboratory was expected to become operational in Q4 2017 and had approximately $1.5 million of backlog.
- The Houston laboratory expansion was expected to be completed in Q1 2018. Management cited growth opportunities from test development, market-share gains, and international Pharma Services expansion, but provided no formal revenue or earnings guidance.
- Hurricanes Harvey and Irma temporarily closed Houston and Fort Myers laboratories. Management estimated about $1.0 million of Q3 revenue and 1.5% of volume were lost as a result.
- Disclosure controls were deemed ineffective because of a material weakness in revenue accrual review. Remediation steps included added finance resources and new monthly review controls. Investors should monitor whether the controls are implemented and effective.
- Key risks include reimbursement pressure, payer denials and preauthorization delays, receivable collection, laboratory regulation and potential FDA oversight of laboratory-developed tests, execution of facility and system expansions, and variable-rate debt exposure. A $50 million interest-rate swap hedged a portion of floating-rate debt through December 2019.
- Management reported no material legal proceedings, while also citing increased legal reserves related to a lawsuit against Clarient. The filing states that no material changes had occurred in the company’s previously disclosed risk factors.
Important facts for investors to verify
- Whether the revenue-accrual material weakness was remediated and whether subsequent reporting avoids further corrections.
- Collection trends, aging of receivables, DSO and bad-debt rates, particularly in light of payer denials and preauthorization requirements.
- Whether Pharma Services backlog converts to revenue as expected, and whether the Geneva launch delivers the projected activity.
- Capital expenditure requirements, revolver availability, covenant headroom, debt repayments and the preferred-stock redemption and dividend terms.
- The effect of reimbursement changes and test mix on realized revenue per test and margins, alongside reported volume growth.
Adjusted EBITDA is a non-GAAP measure. The filing reports corrected adjusted EBITDA of $8.5 million for Q3 and $22.8 million for the nine months, versus $9.1 million and $26.5 million, respectively, in 2016; assess these figures alongside GAAP results.